Food-Energy-Environment Trilemma: Policy Impacts on Farmland Use and Biofuel Industry Development

Abstract

We characterize the impact of biofuel industry development on farmland use competition, referred to as the food-energy-environment trilemma: to grow food or energy crops, or to reserve the land for environmental conservation. We develop an analytical game-theoretic model to analyze the role and implication of two major policy instruments, namely mandates and subsidies, taking into account objectives of multiple stake-holders including farmers, a bioenergy firm, and the government. We characterize the biofuel firm's optimal mandate compliance strategy (whether to comply with the mandate or not) and identify the complementarity roles of mandate and subsidy. Using our model, we illustrate the importance of coordination in policy instruments. In particular, we find that lack of coordination may result in excessive biofuel mandate in the early stage of industry development, while it may lead to insufficient mandate during the matured stage. In addition, we find that such impact can be aggravated when the industry development trajectory is overestimated, pushing the mandate and subsidy levels below the ideal coordinated counterparts. With a case study based on the U.S. Midwest, we address the recent trend in the policy instruments, and draw insights on the future of the industry as well as the sustainability triple bottom line.

Keywords: biofuel industry, farmland use, government policy, mandate, subsidy, triple bottom line